Bonga-Bonga, Lumengo and Umoetok, Ekerete
(2015):
*The effectiveness of index futures hedging in emerging markets during the crisis period of 2008-2010: Evidence from South Africa.*

Preview |
PDF
MPRA_paper_62932.pdf Download (828kB) | Preview |

## Abstract

This paper provides an assessment of the comparative effectiveness of four econometric methods in estimating the optimal hedge ratio in an emerging equity market, particularly the South African equity and futures markets. The paper bases the effectiveness of hedging on volatility reduction and minimisation of the coefficient of variation of hedged returns as well as risk-aversion based utility maximisation. The empirical analysis shows that the single equation method estimated by ordinary least squares is the most effective over daily hedging periods. However, the vector error-correction method and multivariate GARCH methods are most effective over weekly and monthly hedging periods.

Item Type: | MPRA Paper |
---|---|

Original Title: | The effectiveness of index futures hedging in emerging markets during the crisis period of 2008-2010: Evidence from South Africa |

English Title: | The effectiveness of index futures hedging in emerging markets during the crisis period of 2008-2010: Evidence from South Africa |

Language: | English |

Keywords: | emerging markets, optimal hedge ratio, South Africa, index futures hedging, Vector autoregression, Vector error-correction, GARCH |

Subjects: | C - Mathematical and Quantitative Methods > C5 - Econometric Modeling C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing ; Futures Pricing |

Item ID: | 62932 |

Depositing User: | Prof Lumengo Bonga-Bonga |

Date Deposited: | 18 Mar 2015 10:05 |

Last Modified: | 27 Sep 2019 01:32 |

References: | References Agmon, T. & Messica, A. 2009. Financial Foreign Direct Investment: The Role of Private Equity Investments in the Globalization of Firms from Emerging Markets. Management International Review, 49(1), pp.11-26. Angelidis, T. 2010. Idiosyncratic Risk in Emerging Markets. The Financial Review, 45(4), pp.1053-78. Bekaert, G. & Harvey, C.R. 2002. Research in emerging markets finance: looking to the future. Emerging Markets Review, 3(4), pp.429-48. Bekaert, G., Harvey, C.R., & Ng, A. (2005). Market integration and contagion. The Journal of Business. Vol. 78, No. 1, pp. 39 – 69. Bhaduria, S.N. & Duraia, R.S. 2008. Optimal hedge ratio and hedging effectiveness of stock index futures: evidence from India. Macroeconomics and Finance in Emerging Market Economies, 1(1), pp.121-34. Bollerslev, T., Engle, R.F. & Wooldridge, J.M. 1988. A Capital Asset Pricing Model with Time-varying Covariances. Journal of the Political Economy, 96(1), pp.115-31. Bonga-Bonga, L. and Hoveni, J. (2013). Volatility spillover between the equity market and foreign exchange market in South Africa in the 1995-2010 period. South African Journal of Economics, 81(2): 260-274. Bouaziz, M. C., Selmi, N., & Boujelbene, Y. (2012). “Contagion Effect of the Subprime Financial Crisis: Evidence of DCC Multivariate GARCH Models”. European Journal of Economics, Finance and Administrative Sciences. Vol 44, pp. 66 – 76. Chari, A., Ouimet, P. & Tesar, L. 2009. The Value of Control in Emerging Markets. Review of Financial Studies, 23(4), pp.1741-70. Choudhry, T. 2003. Short-run deviations and optimal hedge ratio: evidence from stock futures. Journal of Multinational Financial Management, 13(2), pp.171-92. Chou, W.L., Fan, D.K.K. & Lee, C.-F. 1996. Hedging with the Nikkei Index Futures: the conventional model versus the error correction model. Quarterly Review of Economics and Finance, 36(4), pp.495-505. Degiannakis, S. & Floros, C. 2010. Hedge Ratios in South African. Journal of Emerging Market Finance, 9(3), pp.285-304. DeJong, D.N. & Whiteman, C.H. 1991. Reconsidering Trends and Random Walks in Macroeconomic Series. Journal of Monetary Economics, 28(2), pp.221-54. Dickey, D.A. & Fuller, W.A. 1981. Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica, 49(4), pp.1057-72. Ederington, L.H. 1979. The Hedging Performance of the New Futures Markets. Journal of Finance, 34(1), pp.157-70. Edisona, H.J. & Warnock, F.E. 2008. Cross-border listings, capital controls, and equity flows to emerging markets. Journal of International Money and Finance, 27(6), pp.1013-27. Engle, R.F. 1982. Autoregressive conditional heteroskedasticity with estimates of the variance of U.K. inflation. Econometrica, 50(4), pp.987-1008. Engle, R.F. & Granger, C.W.J. 1987. Co-integration and error-correction: Representation, estimation and testing. Econometrica, 55(2), pp.251-76. Figlewski, S. 1985. Hedging with Stock Index Futures: Theory and Application in a New Market. The Journal of Futures Markets, 5(2), pp.183-99. Franckle, C.T. 1980. The Hedging Performance of the New Futures Markets: Comment. The Journal of Finance, 35(5), pp.1273-79. Gagnon, L., Lypny, G.J. & McCurdy, T. 1998. Hedging foreign currency portfolios. Journal of Empirical Finance, 5(3), pp.197-220. Ghosh, A. 1993. Hedging with Stock Index Futures: Estimation and Forecasting with Error Correction Model. The Journal of Futures Markets, 13(7), pp.743-52. Grammatikos, T. & Vermeulen, R. 2011. Transmission of the financial and sovereign debt crises to the EMU: Stock prices, CDS spreads and exchange rates. Journal of International Money and Finance, 31(3), pp.517-33. Hearn, B., Piesse, J. & Strange, R. 2010. Market liquidity and stock size premia in emerging ﬁnancial markets - The implications for foreign investment. International Business Review, 19(5), pp.489-501. Herbst, A.F., Kare, D.D. & Caples, S.C. 1989. Hedging effectiveness and minimum risk hedge ratios in the presence of autocorrelation: Foreign currency futures. Journal of Futures Markets, 9(3), pp.185-97. Holmes, P. 1996. Stock index futures hedging: hedge ratio estimation, duration effects, expiry effects and hedge ratio stability. Journal of Business, Finance & Accounting, 23(1), pp.63-77. Jianru, F. & Jinghua, W. 2011. The Research of Futures Optimal Hedge Ratio with Different Objective Function. In Hu, W.B. & Wang, W.X., eds. International Conference on Information Technology and Management Engineering. Wuhan, 2011. ASME Press. Johansen, S. 1991. Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models. Econometrica, 5(6), pp.1551-80. Johnson, L. 1960. The Theory of Hedging and Speculation in Commodity Futures. The Review of Economic Studies, 27(3), pp.139-51. Kabundi, A. & Loots, E. 2009. Patterns of co-movement between a developed and emerging market economy: The case of South Africa and Germany. Economic Research Southern Africa, 11 December. pp.2-10. Kim, S.-J. & Wu, E. 2008. Sovereign credit ratings, capital flows and financial sector development in emerging markets. Emerging Markets Review, 9(1), pp.17-39. Kwiatkowski, D., Phillips, P.C.B., Schmidt, P. & Shin, Y. 1992. Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root? Journal of Econometrics, 54(1-3), pp.159-78. Laws, J. & Thompson, J. 2005. Hedging Effectiveness of Stock Index Futures. European Journal of Operational Research, 163(1), pp.177-91. Lien, D. 2005. A Note on the Superiority of the OLS Hedge Ratio. Journal of Futures Markets, 25(11), pp.1121-26. Lien, D. & Shrestha, K. 2008. Hedging effectiveness comparisons: A note. International Review of Economics and Finance, 17(3), p.391–396. Lien, D. & Tse, Y.K. 1998. Hedging time-varying downside risk. Journal of Futures Markets, 18(6), pp.705-22. Lien, D. & Zhang, M. 2008. A Survey of Emerging Derivatives Markets. Emerging Markets Finance & Trade, 44(2), pp.39-69. Lindahl, M. 1992. Minimum Variance Hedge Ratios for Stock Index Futures: Duration and Expiration Effects. The Journal of Futures Markets, 12(1), pp.33-53. Moe, T., Maasry, C. & Tang, R. 2010. EM Equity in Two Decades: A Changing Landscape. Goldman Sachs: Global Economics Paper No: 204, 8 September. pp.2-7. Myers, R.J. 1991. Estimating Time-Varying Optimal Hedge Ratios on Futures Markets. The Journal of Futures Markets, 11(1), pp.39-53. Myers, R.J. & Thompson, S.R. 1989. Generalized Optimal Hedge Ratio Estimation. American Journal of Agricultural Economics, 71(4), pp.858-67. O’Neill, J. 2001. Building Better Global Economic BRICs. Goldman Sachs: Global Economics, Paper No: 66, 31 November. pp.4-11. Olgun, O. & Yetkiner, I.H. 2012. Determination of Optimal Hedging Strategy for Index Futures: Evidence from Turkey. Emerging Markets Finance & Trade, 47(6), pp.68-79. Park, T.H. & Switzer, L.N. 1995. Bivariate GARCH estimation of the optimal hedge ratios for stock index futures. Journal of Futures Markets, 15(1), pp.61-67. Schwarz, G. 1978. Estimating the Dimension of a Model. Annals of Statistics, 6(2), pp.461-64. Schwert, W.G. 1987. Effects of model specification on tests for unit roots in macroeconomic data. Journal of Monetary Economics, 20(1), pp.73-103. Stein, J.L. 1961. The Simultaneous Determination of Spot and Futures Prices. American Economic Review, 51(5), pp.1012-25. Vishwanath, P. 1993. Efficient Use of Information, Convergence Adjustments, and Regression Estimates of Hedge Ratios. Journal of Futures Markets, 13(1), pp.43-53. Wahab, M. 1995. Conditional Dynamics and Optimal Spreading in the Precious Metals Futures Markets Markets. Journal of Futures Markets, 15(2), p.131–166. White, H. 1980. A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity. Econometrica, 48(4), pp.817-38. Yang, W. & Allen, D.E. 2005. Multivariate GARCH Hedge Ratios and Hedging Effectiveness in Australian Futures Markets. Accounting and Finance, 45(2), pp.301-21. |

URI: | https://mpra.ub.uni-muenchen.de/id/eprint/62932 |